More than 1,000 people attended the Commercial Real Estate Finance Council’s annual conference two weeks ago. While the mood was mostly upbeat, signs indicate not all is perfect in the market.
First, several panelists and investors raised concerns regarding slipping underwriting standards. Proforma underwriting assumptions are being reintroduced into the market, and LTVs are increasing. While not yet at the level of 2006, the competition for new loans has caused CMBS loan credit quality to slip.
They also talked about the new money in the B piece market. While having capital for the lowest rated bonds is critical for a healthy market, too much money chasing the deals reduces the leverage the buyers have to kick out bad loans and enforce a quality credit culture.
Highlighting the focus on the importance of credit quality, the keynote speaker for the first day of the conference was Dean Alder, a successful real estate investor known as a value investor with attention to fundamental analysis. He spent almost two hours lecturing the group on how to underwrite, value and structure transactions that make sense.
While I expected half the crowd to walk out of such a technical session, almost no one left — and most people felt inspired and reminded of what it really takes to do the CRE business.
Most panelists believe raising interest rates will cool off the market. Most predict a 50 to 100 bp rise in the next six months.
So, considering the market has had such a successful year, the conference was fairly cautious overall. Maybe things have been so bad for so long, people are skeptical the good times will last.
Or maybe people are thinking we are already well into the next cycle, and nothing has changed from the previous cycles, so they are getting a bit nervous. It will be interesting to see how the rest of the year goes.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.